Natural gas supplier and trader UAB LITGAS, part of Lietuvos Energija energy company group, today has signed a LNG supply contract with Norwegian company Statoil ASA which offered the most favourable conditions. This contract will help to ensure continuous operation of the terminal and will establish a new natural gas pricing policy linked to the natural gas price movements on the international markets. The contract also covers possibilities of LNG reloading – a new commercial activity in the Baltic Sea region.

Starting in 2015 Statoil will be supplying an annual volume of 540 million cubic meters of natural gas (approx. 950 thousand cubic meters of LNG) to ensure continuous operations of the Klaipėda LNG terminal. LITGAS has an obligation to ensure this supply volume as the designated supplier approved by a decree of the Ministry of Energy.

Under the mid-term contract signed with Statoil, the first LNG cargo is expected to be delivered to the Klaipėda terminal at the end of December 2014 so that the terminal could start commercial operation from the 1st of January 2015. Each year Statoil will deliver 6-7 such cargos to Klaipėda port.

“This strategic contract will help to ensure the availability of an alternative natural gas import source which will enable us and other Lithuanian companies to procure natural gas on international markets from various suppliers at any time,” says Dominykas Tučkus, general manager of UAB LITGAS.

“We are delighted to sign a contract with LITGAS. At the same time this contract marks our first step with LNG business in the Baltic Sea region. We hope that will evolve into long-term partnership and will bring mutual benefits to both parties,” says Geir Heitmann, vice president of Statoil LNG Trading and Operations.

The contract also provides possibilities for cooperation in LNG reloading which is a new type of activity in the Baltic Sea region. Gas in liquid form would be pumped to smaller tonnage vessels at the Klaipėda terminal and shipped to small terminals. Successful development of commercial reloading operations would increase the usage of the terminal and would at the same time lower its maintenance costs which are being covered by Lithuanian consumers.

The price of LNG supplied to Lithuania will be linked to the value of the NBP index (Great Britain’s natural gas exchange).

“This type of pricing is new to Lithuania and this means that the price of natural gas supplied by LITGAS will depend on changes in the supply and demand for natural gas, including LNG on the international markets as well as seasonal temperature fluctuations,” adds Tučkus. “Linking to natural gas indices is a common practice in North Western Europe which makes it possible to abandon the indexation of natural gas prices to oil prices which dominates in Eastern Europe and often results in natural gas prices that have no relation to the ones prevailing in the rest of Europe.”

Based on exchange data of the last 4 months, the price of LNG in Lithuania would be in a range of LTL 900-1000 per 1,000 cubic metres adjusted for the calorific value. “However, the natural gas market is seasonal in nature and prices in winter tend to be higher, especially in cold weather,” notes Tučkus.

Like other natural gas suppliers, LITGAS will provide information on the latest prices of supplied natural gas to the National Commission for Energy Control and Prices which, in its turn, draws up and publishes market reports.

According to the scheme established in legislation, LITGAS as the designated supplier has an obligation to supply 540 million cubic metres of natural gas per annum through the LNG terminal for the five years. This volume will be sold to regulated heat and electricity producers (electricity and heat producers that are subject to the regulated heat prices, receive subsidised electricity generation quotas or generate electricity under public service obligations). Their off-take will be proportionate to their gas consumption volume.

LITGAS is also ready to supply more gas than it is currently required by legislation. The company has already entered into 12 non-binding Master Sale and Purchase agreements (MTA/MSPA) with global suppliers. MSPA agreements enable LITGAS to trade on the spot market and to offer natural gas to Lithuanian market from companies whose aggregate supply accounts for more than half of total global LNG supply.

Under these MSPA agreements, LITGAS has also organised a tender for the purchase of the commissioning cargo. The bid submitted by Statoil was recognised to be the most economically advantageous offer (in terms of technical and financial criteria) out of 16 different bids provided by 9 companies. The commissioning cargo will be delivered to Klaipėda port in autumn on DES basis. Commissioning cargo will be used for terminal testing purposes in order to ensure that comprehensive operation of Klaipėda LNG terminal is possible.